The suddenness of the COVID-19 pandemic and an extremely low-interest-rate environment created many challenges for servicers. Of those challenges, four stand out among the rest: 1) an influx of borrower inquiries and requests, 2) keeping track of continually evolving regulations and processes, 3) liquidity constraints, and 4) market volatility. This year, unlike in the 2008 crisis, millions of forbearance, refinance, and loan modification requests happened in a very short period of time. The effect of that suddenness means millions of loans will renew or emerge from forbearance at essentially the same time, while refinance applications and loan modification volume will likely continue to remain high.
Influx of borrower inquiries and requests
Perhaps the most notable challenge servicers are facing is an overwhelming amount of inquiries and requests from many distressed or worried borrowers. Following the initial servicing wave in early 2020, the next wave will likely include working to transition borrowers out of forbearance and discussing loss mitigation options with those who are still facing financial hardship — all while maintaining compliance. It’s important for servicers to have a clear picture of property values in their portfolio to protect their business and give borrowers the best advice. Many servicers will need quick access to updated property valuations to handle borrower demand. The additional demand for valuations and creating new payment plans for struggling borrowers takes more work and expense, which can increase the overall cost per loan.
Potential borrower impacts
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- Borrowers may be referencing outdated information regarding available relief programs, causing confusion.
- Borrowers may not know they qualify for a relief program that allows them to delay payments and have instead accumulated missed payments and late fees.
- Borrowers may be asked to participate in the valuation inspection process.
Potential solutions
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- Proactively engage with borrowers through digital media and offer reassurance and education on the relief options available.
- Leverage real estate valuations such as automated valuation models (AVMs), BPOs, and hybrid appraisals to lower valuation costs.
- Employ a modern tech stack to allow existing staff to engage with more borrowers while keeping cost-per-loan down.
- Deploy technology solutions to drive customer engagement, document workflows, and provide key integrations to current technologies to better serve customers.
Evolving regulations and processes
There’s no shortage of regulations and complex guidelines to keep track of for servicers. Earlier in 2020, the global spread of COVID-19 made an appraisal based on a full interior and exterior inspection of the property unobtainable. Temporary appraisal requirement flexibilities allowed desktop and exterior-only appraisals in certain situations and paved the way for homeowner-enabled inspections to become part of the valuation process. The Coronavirus Aid, Relief, and Economic Security (CARES) Act and other programs added forbearance provisions and additional regulations to keep track of. In addition, similar to many other businesses, servicers’ in-house processes were not prepared to handle the impacts of a global pandemic that seemed to happen overnight, including rapid changes in business processes and the need for the valuation process to become fully digital.
Potential borrower impacts
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- Borrowers may be referencing outdated information regarding available relief programs, causing confusion.
- Borrowers may not know they qualify for a relief program that allows them to delay payments and have instead accumulated missed payments and late fees.
- Borrowers may be asked to participate in the valuation inspection process.
Potential solutions
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- Ensure mitigation actions proactively offered to borrowers comply with regulations on the federal, state, and county levels.
- Use data to identify which borrowers are most likely to face financial difficulties beyond the deferral period and provide them with tailored loan modification solutions.
- Seek out technology solutions to automate default servicing management workflows and processes.
Liquidity constraints
Servicers may also be on the hook to advance monthly mortgage payments to investors. In good times, advancing those payments typically isn’t a significant burden. Less than 3.8 percent of residential mortgage balances were delinquent at the end of 2019, the lowest quarterly rate since the 1970s. But with forbearances skyrocketing, the potential need for advancing unfunded payments is enormous. Additionally, the increased cost of servicing non-performing loans may add to the burden.
The difference between bank and nonbank servicers should also be considered, although for either type of entity, liquidity impacts for delinquent portfolios will be harder to manage since operating costs and servicing advances will be higher. While bank servicers are typically well-capitalized and have sufficient liquidity through their origination shops or other business lines, the story for nonbank servicers is different, and many nonbank servicers face a different cash flow reality. In particular, nonbank servicers may be acutely challenged to continue to fund deferred payments, especially since nonbank lenders made 59 percent of U.S. mortgages last year — the highest level on record — and nonbank lenders make up 86 percent of loans backed by the FHA, Department of Veterans Affairs, and Department of Agriculture.
Potential borrower impacts
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- If servicers cannot stay in business, fewer borrowing options will be available, which could make it harder to get a loan.
- Borrowers seeking an FHA or VA loan will be impacted more by the hardships of the nonbanks.
Potential solutions
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- Seek out warehouse lines and/or government agencies that may offer relief.
Borrower Retention
Borrower retention is another servicing challenge. The pandemic — and the subsequent rise of remote work — has influenced borrowers to move out of large cities to places where they can buy larger homes, live closer to nature, and enjoy a lower cost of living. It’s critical that servicers work to build and grow a relationship with their borrowers over time — going beyond sending a monthly billing statement — because today’s borrowers have access to virtually unlimited refinance options. After all, refinance loans can be considered commodity products, since borrowers usually choose the lender that has the best rates and loan terms. Proactively engaging existing borrowers with relevant analytics is a key brand- and loyalty-building strategy that can improve borrower retention. Servicers already have borrower information in their servicing portfolio, and can use that information as a built-in advantage to streamline the refinance process for existing customers.
Potential solutions
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- Engage with borrowers through monthly marketing initiatives, including thought leadership, helpful tips, and social media.
- Identify opportunities for refinancing, helping borrowers avoid default and deepening the customer relationship.
- Focus on continued digital transformation of the servicing process through modern technology and data-enabled solutions.
